That is right. I honestly believe that. I do not believe that the price of gas is too high. I do believe it has risen over the past year, and I wish it would go back down, but I don’t think it is too high. What should the price per gallon be? Contrary to mainstream belief, the rise in the cost of fuel is NOT due to Exxon executives trying to pad the “corporate coffers.” Nor do I believe that it is foreigners just socking it to us. If you are an oil-producing company or state, your job is to get the highest price possible for it. That what you are supposed to do. There is no shame in that. We all do that with our resources of time and talent. There are far too many buyers and sellers for price of this commodity to ever be too far off the natural supply and demand intersection that price reflects. But what about OPEC? OPEC-SCHMOPEC. They are people too, just trying to moderate an exhaustible resource. If they sell too cheaply, and run dry, gas could go to $1,000 a gallon.
Taking OPEC’s current production strategies as a given, with current levels of gasoline production and use, the right price is about $4 a gallon. The current price is the market-clearing price. I don’t like paying $4 a gallon for gas, but I’m glad that when I want to fill up, I can. I understand that most people will fill their tank whether the sign says $3.50 or $3.90 but that doesn’t mean that that the demand curve is vertical (i.e., we consume the same amount at any price.) There are substitutes but some of these involve a transition cost or time to implement (like Hybrids or carpooling or telecommuting). So if you want gas prices to fall, use less of it. Believe me, if the refineries start having problems emptying their vats, prices will fall quickly. I know the fear is that if we use less, “they” will produce less and price will stay about the same. Keep in mind that every move they make to artificially restrict supply builds pressure on the cartel and lowers barriers to competition.
I saw once what happens when price isn’t adjusted quickly enough to supply and demand. A few days after hurricane Katrina, Dallas area gas stations ran dry. Why? Prices didn’t rise quickly enough to account for the increased demand as thousands of people from New Orleans took refuge in Dallas. Maybe as service stations saw their traffic sharply increase, they thought about tempering it with a price increase but didn’t for fear of “price gouging” as the media calls it. I don’t believe in that concept, at least not in fossil fuels. There are too many sellers. Fortunately, this shortage only lasted a day or so, but believe me, it is far better to buy gas at $4 a gallon than drive for miles past closed gas stations. Gas isn’t too high.
3 comments:
you are right. I am glad that you mentioned that the demand curve is relatively inelastic. I have reduced my demand by carpooling. I anticipate that this will save me two tanks per month - more than $120 at current prices. We will need to adjust our lifestyle to adjust to the current prices and the impact that it has on our own finances.
It is still stinky!
A breath of fresh air!
Remember when the late 70's when the gas prices weren't high enough? I don't but you told me about it. I hope we continue to allow the market to dictate the prices.
I hear a lot of grumbling about the government not allowing drilling in ANWR. I don't know if that would help much. The argument is that if we increase supply the price will decrease. The problem with the argument is that it would be too little and too late.
World Oil supply is 85 million barrels per day. We might get somewhere around 1 million barrels per day from ANWR. That's just over 1% increase in supply - it won't make much difference at the pump. It would take years to develop the oil fields and the transportation. Of course, those aren't reasons not to do it... I just think if people knew what kind of a difference it would actually make they might not be willing to sacrifice those lands for that purpose.
If Bernanke starts increasing interest rates (or at least leaving them alone) the dollar might get stronger which would help gas prices a little...
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